Saturday, May 19, 2007

Inflation: Let's Get Our Definitions Straight

The G8 is worried that the recent rise in oil prices will exacerbate inflation.

"The level of prices [of energy] contributes to inflation in the world, pushing a number of central banks to raise their interest rates...." (Source: article in French.)

It's true that central banks are concerned about the effect of global oil prices on the CPIs of the world, which is strange. Either they are disingenuous, or they are forgetting the definition of inflation.

[Thanks to for the image.]

The definition according to Webster's:

"... a) an increase in the amount of money and credit in relation to the supply of goods and services b) an increase in the general price level, resulting from this, specif., an excessive or persistent increase, causing a decline in purchasing power."

(I didn't even have to go to Gwartney & Stroup for that one.)

In other words, inflation is related to money and credit supply, not to a change in price of any particular good. To maintain otherwise is putting the carriage before the horse -- either that, or our G8 central bankers are inadvertently or purposefully using a mistaken definition of the word.

Why they would do that is anyone's guess. I suspect that it's due to their misplaced hubris. For a century now, they have tried to convince us of their usefulness when in fact, the evidence points in the opposite direction. It is due to their intervention that the 1900 dollar is now worth $.06 or less.

Now they have convinced the marketplace that they can, have, and will control "inflation;" and that's why they're nervous. The world misunderstands the meaning of inflation to mean any price increases, even though the central bankers have all taken economics and know that this is not true. For whatever reason (lack of respect for the common man?), they have neglected to explain the difference between a rise in price caused by short supply and one caused by too much money and credit; and this situation has played to their advantage, up to a point.

The tables are now turning, and it's too late to reverse their game plan.

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